John Kehoe AFR 29 Mar 2012
Slow lending growth and a likely rise in debt defaults will hurt profits at commercial banks, according to the Reserve Bank of Australia, which cautioned the industry against chasing unsustainable returns.
Following the decision by ANZ Banking Group and Westpac Banking Corp to cut thousands of staff and offshore technology and administrative jobs, the RBA’s Financial Stability Review said cost cutting must not lower banks’ credit standards or their ability to manage risk.
The RBA noted the major banks’ cost-to-income ratios had already declined significantly over the past decade and were low by international standards.
Banks are reducing costs to offset weak demand for home and business loans, which has hurt their profits.
“To the extent that these job cuts are in lending and sales, they align with the weaker activity in these areas,” the RBA said.
“If they were to be in risk management or operational areas, however, the performance of these areas could be compromised.”
The central bank issued a veiled warning to ANZ, which is growing in Asia to offset Australia’s weak credit market, stating that expanding too quickly overseas could increase risk.
The four major banks reported a combined profit after tax of $12.1 billion in their latest half-yearly results. While this was about 8 per cent higher than the same period a year earlier, it was slightly below the preceding six months.
Credit is growing at 5 per cent compared with more than 10 per cent for much of the past decade.
The RBA noted that reductions in bad debt charges, which fell 20 per cent to $2.5 billion in the banks’ half-year results and have helped boost profits in recent years, had largely run their course.
Total non-performing assets were 0.90 of a percentage point above the average of the past decade, leaving banks exposed if the economy turned sour, the RBA said.
It noted that economic conditions varied significantly across Australia’s business sector,
In particular it said that the retail, manufacturing, construction and tourism sectors were being challenged by subdued retail spending and the level of the dollar.
“These divergent experiences help explain why banks’ non-performing business loans and business failure rates are somewhat higher than average,” it said.
The RBA noted that the banks had made “significant inroads” in obtaining the money they need for their day-to-day operations by raising more than $45 billion this year, much of which was used to replace government guaranteed bonds which were expiring.
The Australian Financial Review